Brazil: Is The Threat For Real?

I just returned from a 12-day trip to Brazil. I wanted to see first-hand whether everything I've heard about Brazil was truth or fiction. As you might guess, I found some of both.

Quick Observations:

Cost of production is very low. In Mato Grosso, the fastest-growing area, I'd estimate soybean production costs this year at $2.28/bu. That doesn't include transportation costs, however, which can be as high as $1.50/bu for that area of the country. But that still leaves total production costs at well under $4.

Land in Mato Grosso is inexpensive. Land can be purchased ready to plant in the $300-600/acre range. Some land has nearly doubled in price in just the last two years. Roundup costs $9/gallon, seed is approximately $10/bag and you can have almost all the labor you want for $5/person/day.

There are no mortgages to speak of in Brazil. Land is purchased on contract, normally with 20% down in cash. The rest is spread out over the next five years with payments being made in so many bushels per acre.

Most of Brazil is doublecropped. Remember, it has no winter. Particularly in Mato Grosso, soybean acreage harvested before March 5 normally gets planted to corn. Corn doesn't yield very well (doublecrop yields can range from 50 to 100 bu/acre), but it makes a good cover crop. Much of the corn is used in nearby hog facilities built by hog operations from North Carolina.

Mato Grosso receives an average of 70-80" of rain each year — and we pray that the country will have a drought! Think about it!

The key issue, as all of us have heard in the development of new soybean production areas in Brazil, is solving the transportation problem. Unfortunately for us, Brazil is in the process of solving that drawback by using trucks and barges to ship some beans north rather than south for export. When these systems are complete, transportation costs in northern Mato Grosso will drop by 50% or more. This will revolutionize soybean production in Brazil. The easiest way to understand how these changes are taking place is to look how soybean production has grown since 1960 on the maps below.

Bearish Beans?

In the long term, I don't see that there's any way we can compete with soybean production prices in Brazil any more than we can compete price-wise with the clothing industry in China. But that doesn't mean that soybean production in this country is going to disappear. Why?

First, worldwide demand for soybeans is growing just as fast as production. Secondly, we have very tight supplies in the U.S. right now and until the Brazilian crop is completely harvested, bulls still have a short-term case. Third, a very large share of the demand for our soybeans is still domestic. That demand is going to continue to grow and we'll certainly continue producing soybeans to fill the processing needs of the U.S.

Parting Thoughts …

Don't let anyone convince you that the U.S. will only produce corn and all soybeans will be raised in South America. That won't happen. Brazil may become a more dominant player in the world market than the U.S., but we're still going to be a major producer of soybeans.

I would have to admit, however, that it's going to be very difficult to get a major bull market going in soybeans in the years ahead. Soybean prices within the next few months could very well begin with the number four. With government payments, planters will continue to roll and we'll keep producing as many soybeans as we can. FAs long as soybeans stay above $4.50/bu, expansion of production in Brazil will continue at a rapid rate.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visitwww.brockreport.com.